Car loans likely to fall soon

The main reason for this is Reserve Bank of India's (RBI) aggressive open market operations (OMOs) in the last few months through which it pumped money into the system to ease the liquidity situation in the system.Partha Sinha | TNN | July 05, 2016, 13:24 IST

MUMBAI: Strong signals are emerging in the bond market that rates of interest on home, car and consumer durable loans are likely to fall soon. In the last three months, yields on short-term instruments such as government's Treasury Bills (T-Bills), commercial papers (CPs) and certificates of deposit (CDs) have shown a southward drift.

The main reason for this is Reserve Bank of India's (RBI) aggressive open market operations (OMOs) in the last few months through which it pumped money into the system to ease the liquidity situation in the system.

According to one economist, decline in lending rates could be as much as 50 basis points (100 basis points = 1 percentage point) in coming months. The spoiler for rate cuts, however, could be the drying up of foreign fund flows due to the impact of Brexit and outflows due to dollar-denominated deposits by NRIs, also called FCNR (foreign currency non-resident) deposits, economists warned. As the liquidity situation improves and short-term rates soften, lenders will find it easy to get funds at cheaper rates for forward lending.

This, in turn, leads to lower rates of interest in the economy. Consider these: Since early May, net core liquidity requirement from the banking system fell from a high of Rs 1.06 lakh crore to a surplus of Rs 10,361 crore last week. In the short-term money market, the government's 91-day T-bill rates fell from 6.90% in mid-April to 6.50% on Friday while the call money rates fell from about 6.40% in mid-April to 5.91% now.According to Soumyajit Niyogi, associate director-credit & market research group, India Ratings & Research, the RBI achieved its desired neutral liquidity in the first quarter itself mainly on account of Rs 80,000-crore OMO purchases in the past three months and a reduction in cash in circulation in June 2016. "The core systemic liquidity has turned neutral in the last week, from an average 0.8% of net demand of time liabilities in April 2016," Niyogi wrote in a note on Monday. India Ratings believes there could be more OMOs this fiscal, since systemic liquidity could change.

Economists warned that in case foreign funds stop their flows into India as a result of Brexit, that could further increase liquidity in the system. According to Indranil Sen Gupta, chief India economist, Bank of America Merrill Lynch, banks are expected cut rates by 50 basis points by September, if OMOs by the RBI continues. "We highlight three event risks. First, we expect the ongoing tax amnesty scheme to net Rs 85,000 crore, constricting liquidity temporarily. Second, any tightening due to bunching up in end-September should be offset by the arrears payment of about Rs 30,000 crore to implement the seventh pay commission recommendations before Diwali. Finally, banks should be able to fund FCNR outflows in September," Sen Gupta said in a note.

Prices of most SUVs were cut between Rs 1.1 lakh and Rs 3 lakh following the implementation of GST, which subsumed over a dozen central and state levies like excise duty, service tax, and VAT from July 1.